1. Sustainable/Green Water Resources Management
Prof. Dr. Phoebe Koundouri
Head of Research Unit of Environmental & Natural Resource Economics
ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS
Web Pages:
NEW Website of the Research Unit of Environmental & Natural Resources Economics will be running on Monday at

2. WFD: A truly integrated Directive

3. An obligation of result
WFD, A MILESTONE IN EUROPEAN WATER POLICY
Never-ending process
WFD: 3 key principles
An obligation of result
Continuous transparency

4. AN OBLIGATION OF RESULT
A compulsory goal: "good status of water"
a general obligation:  applies to all member-states  applies to surface and groundwater
a secondary goal: prevent deterioration of status
Actions to be defined with regards to the goal X
Good status
how to fill-in the potential gap between "business as usual" scenario and the goal?
2003
2015 X
Business
as usual
update measures in order to reach the goal
Limited possibilities for exemptions
extensions of deadlines
achievement of less stringent environmental objectives

5. Underlining Concept: Sustainable Development
Sustainable development (SD) is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations.

6. Triple goal of SD over space (i) and time (t)
Environmental/ Ecological Sustainability (ecosystem resilience, resource-specific equilibrium)
Economic Sustainability (economic efficiency by economic sector)
Social Sustainability (affordability & equity by income group)

7. Where do economics come in?
Articles 5: Socio-Economic characterization of RB
Article 9: cost-recovery and allocation
Annex III: guidance for economic analysis, program of measures & CBA

8. WFD: A Manual of Implementation 3-step economics approach
Economic characterization
of the river basin
Step 1
The assessment of the recovery of
the costs of water services
Step 2
The economic assessment of potential
measures for balancing
water demand & supply
Step 3

9. Step 1: Economic characterization of the river basin & identification of significant issues
Step1_A. Evaluation of the economic significance of water in the region.
Step1_B. Identification of key economic drivers influencing pressures and water uses.
Step1_C. How will these economic drivers evolve over time & how will they influence pressures?
Step1_D. How will water demand and supply evolve over time & which problems their paths are likely to cause?
Construct
Baseline
Scenario
Time & Money Constraints Define the Detail of Step 1!

10. Step1_A. Evaluate the Economic Significance
Step1_A. Evaluate the Economic Significance of Water Uses in the Region
Residential (e.g. population connected to public water supply system, population with self-supply, number of water supply companies, etc.).
Industrial (e.g. turnover for key sub-sectors, employment in sectors, etc.)
Agricultural (e.g. total cropped area, cropping pattern, livestock, gross production, income, farm population, etc.)
Tourism (e.g. total number of tourist days, daily expense per tourist day, employment and turnover in the tourism sector, etc.)
Health Related Services
Environmental and Ecosystem Services

11. Step1_B. Identify Key Economic Drivers Influencing Pressures and Water Uses
General socio-economic indicators and variables (e.g. population growth, income, employment).
Key sector policies that influence significant water uses (e.g. agricultural and environmental policies).
Production or turnover of main economic sectors / significant water uses.
Implementation of planned investments linked to existing regulation, likely to affect water availability.
Implementation of future (environmental and other) policies likely to affect water uses.

12. Step1_C. Evolution of Economic Drivers & their Influence on Pressures
Changes in demographic factors, e.g. population growth in specific urban areas.
Economic growth and changes in economic activity composition, e.g. changes in the relative importance of services/sectors.
Changes in land planning, e.g. new areas dedicated to specific economic activities, etc.
Changes in social values and policy drivers, e.g. globalization.
Changes in natural conditions, e.g. climate changes.
Changes in non-water sector policies, e.g. changes in agricultural policy or industrial policy that will affect production and consumption in economic sectors.
Planned investments in the water sector, e.g. for developing water services, for restoring the natural environment/mitigating for damage caused by given water uses.
Development of new technologies likely to impact water use for industrial production and related pressures.
Trend
variables
Critical
Uncertainties
Water Policy
Variables

13. Step1_D. Evolution of Demand and Supply
- Evaluation of spatial and dynamic availability of significant water bodies.
- Apply appropriate methodologies to assess sector-specific water demand.
Anthropocentric
Values
 Structure & Processes
 Environmental
Functions
 Human
Benefits
Environment
Use Non-Use
Values Values

14. Market Failure Environmental resource is a Public Good
Not explicitly traded in any market
No market price exists to reveal TEV (Hidden demand).
We need to retrieve TEV via WTP
Non-market Valuation Methods

15. Estimating Demand in Step1
i. Identification of Sector Water Demands in the Watershed Area
Households
Industry
Agriculture
Environment
ii. Valuation Techniques for Specific Types of Water Demand
Use Value
Non-use
Revealed preference methods (indirect methods)
Hedonic Pricing Method
Travel Cost Method
Averting Behaviour Method
Residual Analysis (Production Cost Method)
Valuation techniques
Hedonic valuation technique: The behavior of users and markets is observed. For instance, farm prices in an area with good groundwater are most likely higher than in an area without either ground- or surface water. Comparing differences in farm prices across a certain region and assuming that other variables are the same, then the difference in prices of these farms would lie in groundwater access.
Contingent valuation technique: Questioning on hypothetical futures. It involves asking people directly what they would be willing to pay for a hypothetical change in the future state of the world.
The residual analysis: This method values all inputs for the good produced at their market price – except for the water itself. The remaining value of the good, after all other inputs are accounted for, is then attributed to the water input.
Travel Cost Method: Inferring the value of a set of attributes from expenditure (time and money spent on the trip) on outdoor recreational facilities or visits to nature reserves.
Existence & Values for others:
Contingent Valuation Methodology
Choice Experiments: Field, Lap
Meta-Analysis Method
Methods not strictly based on economic welfare
Replacement Cost Methods
Restoration Cost Methods

16. Hedonic Valuation Method (HVM)
A resource can be defined in terms of services it yields or an `attribute' it embodies. This attribute may be embodied in other goods or assets which are marketed, and which do have observable prices. Using these prices you can derive economic value.
E.g: Farm prices in an area with good groundwater are most likely higher than in an area without either ground- or surface water. Comparing differences in farm prices across a region and controlling for other influences, then the difference in prices of these farms would lie in groundwater access.
Problems:
Only capable of measuring the subset of use values that people are WTP for through the related market.
If consumers are not fully informed about the qualities of the attributes being valued, hedonic price estimates are of little relevance.

17. Travel Cost Method (TCM)
Infers the value of a set of attributes from expenditure (time and money spent on the trip) on outdoor recreational facilities or visits to nature reserves.
E.g: Valuing the effects on the demand for recreation of a change in water quality in a river.
Problems:
- Capable of measuring the subset of values that people are WTP for in the related market.
- Very few applications outside resource-based recreational amenities.
- Data-intensive.
- What value should be assigned to time costs of travel?
- Statistical problems & sample bias.

18. Averting Behavior Method (ABM)
Use of expenditures undertaken by households that are designated to offset an environmental risk, in order to infer WTP for avoiding environmental degradation.
E.g: Use of water filters.
Problems:
- Limited to cases where households spend money to offset environmental hazards.
- Insufficient studies to comment on convergent validity.

19. Residual Analysis Method (RAM)
Values all inputs for the good produced at their market price – except for the water itself. The remaining value of the good, after all other inputs are accounted for, is then attributed to the water input.
E.g: Valuing water as an input in production of different crops.
Problems:
Only part of use-value of water can be captured.
Market imperfections can bias valuation estimates.

20. Contingent Valuation Method (CVM)
CVM relies on a constructed, hypothetical market to produce monetary estimates of value. The value of an environmental resource to an individual is expressed as:
- Maximum Willingness-to-Pay (WTP)
Minimum Willingness-to-Accept (WTA, Compensation)
E.g: Conduct survey to obtain peoples’ bids (either WTP or WTAC) for a specified change in the quality of water in a river, contingent upon the description of a hypothetical market where water quality is traded.
Problems:
Interviewing bias - Non-response bias
Strategic bias - Yea-saying bias
Hypothetical bias - Information bias

21. Choice Experiment Method (CEM)
CEM is a survey-based technique which can estimate the total economic value of an environmental stock/flow or service and the value of its attributes, as well as the value of more complex changes in several attributes.
E.g: Each respondent is presented with a series of alternatives of the environmental stock/flow or service with varying levels of its price and non-price attributes and asked to choose their most preferred option in each set of alternatives.
Problems:
- Simplified version of reality … but CEM eliminates or minimises several of the CVM problems (e.g. strategic bias, yea-saying bias, embedding effects).

22. Operational at the policy level?
Question: How can these methods be made operational in the context of the development of groundwater management strategies at the policy level?
Answer: Recent years have seen a growing interest in the potential for producing generally applicable models for the valuation of non-market environmental goods and services, which do not rely upon expensive and time-consuming original survey work, but rather extrapolate results from previous studies of similar assets.
This approach is called meta-analysis for the use and non-use values generated by environmental resources.

23. Meta-Analysis Method (MAM)
Meta-analysis is the statistical analysis of the summary of findings of empirical studies: i.e. the statistical analysis of a large collection of results from individual studies for the purpose of integrating the findings.
E.g: Freshwater fishing meta-analysis of valuation studies.
Meta-analytical research seems to have been principally triggered by:
Increases in the available number of environmental valuation studies.
- Seemingly large differences in valuation outcomes as a result of use of different research designs.

24. Environmental Benefits-Transfer
Transposing monetary environmental values estimated at one site (study site) to another (policy site).
Values must be adjusted to reflect site specific features.
When time or resources are limited, this provides an alternative to conducting a valuation study. Using meta-analysis for benefits transfer has advantages.
E.g: Environmental Valuation Reference Inventory (
Problems
- May involve bias
- Validity and reliability issues

25. List of case studies on water-valuation from my research team
Direct use values:
Irrigation for agriculture PF, RC, MP
Domestic and industrial water supply PF, RC, MP
Energy resources (hydro-electric) CV
Transport and navigation CV
Recreation/amenity HP, TC, CVM, CEM
Wildlife harvesting CEM
Indirect use values
Nutrient retention RC
Pollution abatement RC
Flood control and protection RC, CEM
Storm protection RC, PF
External eco-system support RC, CEM
Micro-climatic stabilisation PF, CEM
Reduced global warming RC, CEM
Shoreline stabilisation RC, CEM
Soil erosion control PF, RC, CV, CEM

26. List of case studies on water-valuation from my research team
Option values
Potential future uses of direct and indirect uses CVM, CEM
Future value of information of biodiversity CVM, CEM
Non-use values
Biodiversity CVM, CEM
Cultural heritage CVM, CE
Bequest, existence and altruistic values CVM, CE

27. Methodology for Constructing Baseline Scenario Using Parameters from in Step 1
Consider three possibilities of evolution of population.
Consider two possibilities of evolution of demography of other cities in the region.
Consider possible evolution of rural population. 2
Build scenarios using basic assumptions and quantify the water balance with these assumptions.
Key isssues:
Forecast not only investments but other parameters and drivers influencing water supply and demand.
Not rely too much on a mere projections of past trends.
Identify uncertain variables
Build a series of alternative scenarios using alternative assumptions wrt policy options
Practical tasks for deriving the baseline scenario: 3
Apply step two over time. 4
Based on steps 1,2,3, imagine a plot that tells the story of the system from now until at least 2030, giving consistency to the assumptions and water balance curves.
Longer-term projections of variables
2. Project certain changes in water policy variables
Build several baseline scenarios
3. Integrate changes in “critical uncertainties”.
Short-term projections of trend variables based on existing trends
1. Assess current trends in trend variables (physical parameters & socio-economic drivers)
Output
Task

28. How to apply the ‘Baseline scenario’?
Measures to close the gap are needed!
2003
2015
2021
Water Balance/
‘Good Water Status’
Initial status
gap
Starting from initial
status it is possible
to elaborate a
baseline scenario.
The baseline scenario
refers to the situation
without doing
anything else than
planned today.
Task1:
Identify trends in physical parameters (Map evolution of trends in water status over the past relevant period, e.g evolution of pollution & ecological quality)- Overview of the general trends in the hydrological system
Identify trends in socio-economic drivers influencing water uses, water services and impacts (Map evolution of equipment, e.g. water distribution and sewage, pricing, uses & Impact) -Overview of general trends in water uses and services
Task2:
Make assumptions about the future dynamics of trend variables (Check stability of parameters, e.g. tax levels, public network connection, What is the effect of proposed future measures on water status?) Assumptions on future dynamic of trends
Make projections based on certain trends (Derive projected values of different parameters for 2015, propose one or several combinations of assumptions on trends) Baseline scenario projections
Task3:
Identify changes in parameters that are uncertain and could affect water policy (Increased magnitude and frequency of uncertain events: policy changes, technological advencements, floods, droughts, Socio-economic changes in: economic growth cycles, investment flows, employment, taxing system, consumption habits) - Altrenative Scenaria.
Date at which ‘Water Balance’
should be met.

29. Step2: Assess Cost-Recovery of Water Services
Step2_A. How much do current water services cost?
Step2_B. Who pays these costs?
Step2_C. What is the current cost-recovery level?
Step2_D. Propose cost-recovery mechanisms.

30. Step2_A&B. Current cost of services Who pays for these costs?
Estimate costs of water services by sector.
Do users and/or institutional mechanisms recover these costs?
RESOURCE
COST
ENVIRONMENTAL
COST
FINANCIAL COSTS
TOTAL
ECONOMIC
VALUE
CAPITAL
COST
OPERATION &
MAINTENANCE
(O&M)
COST
RESOURCE
ADMIN
COST
FORGONE
VALUE OF
ALTERNATIVE
USES
(present/future)
EXTERNAL COST OF
WATER
QUALITY
REDUCTION
COST OF
WATER
ABSTACTION
PAID BY
USERS
Analysis per use: Households, Tourism, Industry, Agriculture, Ecosystem, etc. per RBD

31. Step2_C. Current cost-recovery level.
Elements to be investigated:
Status of key water services (e.g. number of persons connected).
Costs of water services (financial, environmental & resource costs).
Institutional set-up for cost-recovery (e.g. prices and tariff structure, direct & indirect subsidies, cross-subsidies).
Contribution from key water uses to the recovery of costs.
Resulting extent of cost-recovery levels, linked with the affordability for water users.
Assessing cost-recovery (for each water service):
Prices for water services
. Current water price (price level, price structure)
. Subsidies (government/regional authorities, cross-sectors)
Financial costs of water services
. Capital costs (historical value, replacement value)
. Operation and maintenance
. Administrative costs
Environmental costs
. Internalised costs through charges and taxes
. Direct assessment (changes in environmental quality, economic value/WTP)
. Costs of preventive and mitigation measures (implemented , required for restoring good water status)
Basic economic information and indicators
. Discount rate (for reasons related to sustainability you should consider declining discount rates)

32. Results for cost-recovery for Greece

33. Βαθμός Ανάκτησης Κόστους ανά Υδατικό Διαμέρισμα
Βαθμός Ανάκτησης Κόστους ανά Υδατικό Διαμέρισμα
Υδατικό Διαμέρισμα
Βαθμός Ανάκτησης Κόστους (%)
Αττικής
106.13
Θράκης
78.28
Κεντρικής Μακεδονίας
78.27
Ανατολικής Μακεδονίας
70.74
Βόρειας Πελοποννήσου
68.22
Ηπείρου
68.11
Ανατολικής Στερεάς Ελλάδας
57.61
Δυτικής Μακεδονίας
51.71
Κρήτης
50.91
Δυτικής Πελοποννήσου
50.54
Δυτικής Στερεάς Ελλάδας
46.19
Νήσων Αιγαίου
37.84
Ανατολικής Πελοπονήσσου
34.18
Θεσσαλίας
29.82

34. Βαθμός Ανάκτησης Κόστους Ύδρευσης Ανά Υδατικό Διαμέρισμα
Βαθμός Ανάκτησης Κόστους Ύδρευσης (%)
Αττικής
108.14
Θράκης
103.29
Κεντρικής Μακεδονίας
86.58
Ανατολικής Μακεδονίας
79.39
Βόρειας Πελοποννήσου
77.31
Ανατολικής Στερεάς Ελλάδας
75.1
Ηπείρου 71
Δυτικής Πελοποννήσου
62.21
Δυτικής Στερεάς Ελλάδας
61.29
Δυτικής Μακεδονίας
53.55
Κρήτης
49.67
Νήσων Αιγαίου
42.94
Ανατολικής Πελοποννήσου
37.89
Θεσσαλίας
33.66

35. Βαθμός Ανάκτησης Κόστους Άρδευσης ανά Υδατικό Διαμέρισμα
Βαθμός Ανάκτησης Κόστους Άρδευσης (%)
Κρήτης
56.25
Δυτικής Μακεδονίας
41.05
Ανατολικής Μακεδονίας
27.38
Ηπείρου
22.44
Αττικής
21.30
Βόρειας Πελοποννήσου
19.41
Ανατολικής Στερεάς Ελλάδας
15.98
Ανατολικής Πελοποννήσου
15.66
Δυτικής Στερεάς Ελλάδας
14.28
Κεντρικής Μακεδονίας
12.04
Δυτικής Πελοποννήσου
11.44
Θράκης
11.05
Θεσσαλίας
6.38
Νήσων Αιγαίου
1.78

36. Step2_D. Identify potential cost-recovery mechanisms/Green Investments?
Pricing
Tradable permits
Quotas
Taxes/subsidies
Direct Controls
Educational/Awareness Campaigns
Voluntary Agreements
Legal Instruments, etc.
Green Investments in:
Pollution Control and Remediation
Resource Conservation and Management
Land Use and Infrastructure
Renewable Energy Sources
Subsidies are allocated to either providers, users or polluters in different ways.
Subsidies can be paid directly by the central or local government:
to the provider of water services in the form of investment subsidies (capital subsidies, lowering fixed costs)
to the provider of water services in order to co-finance the operation of infrastructure (operational subsidies, lowering variable costs)
to water users (income transfers, lowering the price/charges paid by the user)
Subsidies can be paid indirectly by
users/ polluters paying the costs of other users / polluters. Cross subsidization may arise between different users (households, agriculture, industry), different regions (dry and wet, populated or less populated) and/or different types of users (rich or poor, small or large users)

37. Step3: The economic assessment of potential measures for reaching good water status
Step3_A. Identify least-cost set of measures.
Step3_B. Assessment of cost of measures.
Step3_C. Assessment of the impact of measures on economic sectors/uses.
Step3_D. Are costs of measures disproportionate?

38. Step3_A. Search for Least-Cost Set of Measures
COST EFFECTIVENESS OF PACKAGE OF MEASURES:
Economic instruments (e.g. abstraction/pollution taxes, tradable permits, subsidies).
Measures to increase awareness regarding water scarcity, aiming at reducing abstraction/pollution.
Direct controls on pollution dischargers.
Agri-environment programs providing financial and technical assistance for, e.g. reallocation of crop production mix over agricultural land, adoption of water-saving technologies coupled with land-allocation restrictions, etc.
Green Investments

39. Classification of Economic Instruments
Advantages
Disadvantages
1. Standards and Quotas
Not economically efficient
2. Water abstraction charges
Adjustment of price signals to reflect actual resource costs; encourage new technologies; flexibility; generation of revenues
Low charges will have minimal impact on user behavior and will continue in resource over-utilization; Difficult to police
3. Pollution charges
Same as water abstraction charges; polluter-pays principle
Same as water abstraction charges
4. Subsidies on water saving measures
Readily acceptable
Financial Constraints
5. Tradable permits
Quantity based targets that are able to attain least-cost outcome. Allows flexibility.
May entail high transaction costs
6. Voluntary agreements
7. Liability legislation
Assess and recover damages ex-post but can also act as prevention incentives
Require an advanced legal system; high control costs; burden of proof
Needs High Env Awareness

40. Step3_B. Assessment of Cost of Measures
- Estimate a range of costs along with key parameters influencing costs over time (cost change with developments in sectors).
- Allocate costs of measures to water users and identify winners and losers, in order to potentially feed into the analysis of disproportionate costs to justify derogation (Step3._D).

41. Step3_C. Impact of Measures on Key Economic Sectors/Uses
Net impacts on public expenditures and revenues: e.g.
impacts on expenditures for agri-environment schemes
revenues of economic instruments
impacts of changes in the prices charged for publicly owned water services.
Wider economic and social impacts: e.g.
significant changes in patterns of employment
economic impacts on industries & local economic development from changes in the price of water supply, level of discharges and water quality.
Effects on the retail price index and inflation.

42. Step3_D. Disproportionate Costs/Derogation
Important for
budget-constrained
developing countries!
Step3_D. Disproportionate Costs/Derogation
Disproportionality
If the achievement of good water status has significant adverse effects on the wider environment & human activities.
If the beneficial objectives served by the artificial or modified characteristics cannot reasonably be achieved by other means.
Measures to improve water
quality are expensive
Heavily Modified Water bodies
Water bodies substantially changed in character
as a result of physical alterations by human activity.
Time derogation
Less stringent
objectives
The concept of disproportionate costs can be assessed by comparing the existing costs of delivering the use, service or beneficial objective, with the costs of alternative options.
For the existing situation: operation and maintenance costs, but also replacement costs (principal and interest payment)
For each option/alternative: capital costs, principal and interest payment), operation and maintenance costs and possible foregone benefits from changes in economic activities resulting from the option (e.g. reduction in agricultural production resulting from the development of a retention area as an alternative to dikes for preventing floods).
!! Disproportionality is a political judgment informed by economic information: CBA
- Disproportionality does not begin when measured costs exceed quantifiable benefits.
- The margin of excess costs should be appreciable & have a high level of confidence.
Disaggregated analysis to the level of separate socio-economic groups and
sectors is needed, especially if the ability to pay is an issue for a particular group.

43. Step3_D. CBA: Cost-Benefit Analysis
Cost Benefit Analysis (CBA) is an economic tool for government policy and investment project analysis used widely.
Can incorporate environmental impacts of policies/projects within CBA to correct for market failure
“Social” appraisal of policies and projects, carried out by aggregation of benefits from, and costs of a policy/project over individuals and over time
Welfare theoretic underpinning: Economic efficiency with a temporal dimension
The concept of disproportionate costs can be assessed by comparing the existing costs of delivering the use, service or beneficial objective, with the costs of alternative options.
For the existing situation: operation and maintenance costs, but also replacement costs (principal and interest payment)
For each option/alternative: capital costs, principal and interest payment), operation and maintenance costs and possible foregone benefits from changes in economic activities resulting from the option (e.g. reduction in agricultural production resulting from the development of a retention area as an alternative to dikes for preventing floods).

44. CBA Steps Stage 1: Definition of policy/project:
The reallocation of resources being proposed
The population of gainers and losers being considered
Stage 2: Identification of policy/project impacts:
Define all impacts that will result from policy/project implementation
Consider additionality (net impacts) and displacement (crowding out)

45. CBA Steps Stage 3: Identification of economically relevant impacts:
Environmental impacts of a policy/project are relevant in CBA if either
They change the utility of at least one person in the society
They change the quantity or quality of the output of some positively valued commodity
Stage 4: Physical quantification of relevant impacts:
Determine physical amounts of costs and benefits and when they occur in time
Use environmental impact analysis to estimate the impact of policy/project on the environment
Estimations will be made with uncertainty, calculate the expected value of costs and benefits

46. CBA Steps Stage 5: Monetary valuation of relevant effects
All physical measures of impacts should be valued in common units to be comparable
Common unit = money
CBA analyst must
Predict prices for value flows extending into the future
Correct market prices where they are distorted
Calculate prices where non exists using environmental valuation methods

47. CBA Steps Stage 6: Discounting of costs and benefits:
Once costs and benefits are expressed in monetary units they should be converted to present value terms by discounting
PV= Xt[(1+r)-t] where X= cost or benefit; r = discount rate; [(1+r)-t] discount factor; t= time
The higher the value of t the lower the discount factor
The higher the discount rate for a given t the lower the discount factor

48. CBA Steps Stage 7:Applying the net present value test:
Apply NPV test to choose those policies and projects that are efficient in terms of their use of resources
Where Bt = benefits of the project at period t, Ct = the costs of the project at period t, r = the discount rate, n = the number of years over which the project will operate
NPV is the present value of the project’s/policy’s net benefit stream, obtained by discounting the stream of net benefits produced by the project/policy over its lifetime, back to its value in the chosen base period, usually the present.
If NPV>0 accept policy or project (Based in Kaldor-Hicks Criterion) since it would improve social welfare

49. Is Discounting so straight forward?
‘Humanity has the ability to make development sustainable: to ensure
that it meets the needs of the present without compromising the ability
of future generations to meet their own needs.’ WCED, 1987
‘There is something awkward about discounting benefits that arise a
century hence. For even at a modest discount rate, no investment will
look worthwhile.‘ The Economist (1991), March 23, p 73.
In the decade since that comment in The Economist, the nature of the
problem with long-run discounting has become clearer.

50. The Need for Time Declining Social Discount Rate…
There are powerful reasons for choosing a declining social time
preference rate. This conclusion is supported by robust recent
theoretical work, which has taken several different approaches to the subject.
Although there is a paucity of empirical evidence on the pattern of that rate's decline, it may be better to use those data, which are available rather than to continue practicing discounting
with non-declining rate in the long term. The data best suited the policy-makers' need were produced by Newell & Prizer (2003) and Koundouri et al (2005).

52. Case Study: Floods Defense
Over the last ten years, flood-defence investment has been characterized by annual expenditure that has been assumed to offset significant damage; i.e., a cost–benefit ratio much greater than unity.
Stochastic model designed to assess the costs and benefits of investment in a particular cell (protected area) of flood defences for Shrewsbury for the Environment Agency.
The model determines the net benefit of investment by comparing the damage suffered in a ‘do nothing’ scenario, with damages in the case where 100-year flood defences have been constructed. The benefits can then be compared with the costs of constructing and maintaining the defences.

53. Benefit–cost ratio for a particular cell of flood defences in Shrewsbury

54. Suggested Step Schedule of Discount Rates
Period of Years
Discount Rate (%)
0 – 30
3.5
31 – 75
3.0
76-125
2.5
2.0
1.5
301 +
1.0

55. Effect of shift from flat 3.5% to the step schedule of discount rates
Project time horizon
Potential effect on project NPV
0-30 years
Small, generally insignificant
years
Significant (± 50%)
years
Large impact (± 100%)
years
Major impact (± 150%)

56. Summary of the 3-Step Methodology
Economic analysis needs to be integrated with other field expertise (hydrology, geology, engineering, sociology, etc.) and be considered all along the management & decision-making process.
Summary of the
3-Step Methodology
1- Characterisation of the river basin
economic significance of water uses
trends in key indicators and drivers
dynamic path of demand and supply of water
gaps in water status by the agreed date of meeting ‘water balance’?
2- Assess current cost-recovery
how much water services cost and who pays this cost?
how much of this cost is recovered?
potential cost-recovery mechanisms
3- Identification of measures and economic impact
construction of a cost-effective programme of measures
assessment of cost-effectiveness of potential measures
financial & socio-economic implications of the programme of measures
are costs disproportionate? Derogations

57. Thank you. Prof. Dr. Phoebe Koundouri
Head of Research Unit of Environmental & Natural Resources Economics
ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS
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